Sanmina: The Hidden AI Infrastructure Play at a Discount - SANM Stock Research Report

## Executive Summary / Key Takeaways * Sanmina is executing a transformative pivot into AI data center infrastructure through its $2.05B acquisition of ZT Systems, which management expects to double revenue to $16B within two years while expanding operating margins toward 6-7% plus. * The legacy business demonstrates remarkable operational discipline, delivering 7.4% revenue growth and 14.4% EPS growth in FY2025 with strong cash conversion ($478M FCF) and a pristine balance sheet (0.32x leverage pre-acquisition) that provides a robust foundation for integration. * A significant valuation disconnect exists: trading at 0.97x sales and 29x earnings, Sanmina trades at a steep discount to AI-exposed peers like Celestica (TICKER:CLS) (76x earnings) despite comparable margin profiles and superior balance sheet strength. * The company’s specialized engineering moats in regulated industries (medical, defense, aerospace) create sticky customer relationships and premium pricing power, with the Components segment delivering 14.6% gross margins that are materially higher than traditional EMS peers. * Critical execution variables for investors to monitor include successful ZT Systems integration without margin dilution, realization of targeted $5-6B annual revenue contribution, and navigation of geopolitical complexities while maintaining the high single-digit growth trajectory in legacy operations. ## Setting the Scene Sanmina Corporation, founded in California in 1980 and reincorporated in Delaware in 1989, operates as a high-complexity manufacturing specialist in the notoriously crowded electronics manufacturing services (EMS) industry. Unlike mass-market assemblers chasing consumer electronics volume, Sanmina built its foundation serving OEMs in industrial, medical, defense, aerospace, and automotive markets—sectors where regulatory compliance, traceability, and mission-critical reliability command premium economics. This strategic positioning created a durable competitive moat: while competitors Flex (TICKER:FLEX) and Jabil (TICKER:JBL) battle for scale in commoditized consumer segments, Sanmina cultivated deep engineering partnerships where switching costs are measured in years of certification and validation, not pennies per unit. The company generates approximately 80% of its $8.13B annual revenue from Integrated Manufacturing Solutions (IMS), encompassing printed circuit board assembly, high-level system integration, and direct order fulfillment. The remaining 20% flows from Components, Products and Services (CPS), a higher-margin portfolio of proprietary technologies including optical modules, advanced microsystems, and defense-grade assemblies. This bifurcation matters profoundly for investors because it bifurcates the earnings power: IMS delivers essential scale and customer access but at 7.8% gross margins, while CPS generates nearly double the margin at 14.6%, creating a profit engine that can fund strategic expansion. Sanmina sits at a critical inflection point. The EMS industry faces structural upheaval as hyperscale cloud providers pour $500B to $1 trillion into AI data center infrastructure by 2028, while simultaneous reshoring and tariff pressures force OEMs to regionalize supply chains. Traditional EMS players risk disintermediation as customers demand full-system integration rather than component assembly. Sanmina’s October 2025 acquisition of ZT Systems’ data center infrastructure business from AMD (TICKER:AMD) represents a decisive response to these dynamics, instantly catapulting the company into the AI infrastructure elite and challenging the notion that mid-tier EMS providers cannot compete with giants like Foxconn (TICKER:HNHPF) and Flex in next-generation platforms. ## Technology, Products, and Strategic Differentiation Sanmina’s core competitive advantage resides in its specialized engineering expertise for regulated, high-complexity applications. The company manufactures optical modules from 100G to 1.6T for AI and high-performance computing, fabricates defense-grade printed circuit boards in US-based facilities, and produces precision mechanical systems for jet fighters where failure is not an option. This capability translates directly to pricing power: CPS segment gross margins expanded 320 basis points year-over-year in Q3 2025 to 14.7% because customers cannot easily replicate this expertise or qualify alternative suppliers without multi-year validation cycles. The moat is not just technical—it is temporal and contractual. The ZT Systems acquisition fundamentally alters the technology trajectory and addressable market. ZT brings full-system integration capabilities for data center racks, complementing Sanmina’s existing strengths in high-technology PCBs, liquid cooling manifolds, custom memory, and optical modules. Management describes this as enabling “end-to-end solutions from design to full system,” which matters because it moves Sanmina up the value chain from $50 component supplier to $50,000 system integrator. The revenue per customer engagement could increase 100-fold, while the margin structure benefits from capturing value across the entire assembly and test process rather than competing for isolated PCB fabrication bids. R&D investments further cement this positioning. Sanmina is expanding its India joint venture with Reliance (TICKER:RELIANCE.NS) to build AI-focused manufacturing capacity, scaling precision machining for military applications, and developing custom optical pluggables for both hyperscale data centers and defense platforms. These investments are not speculative science projects—they directly support $5.02B in industrial/medical/defense revenue where replacement cycles are measured in decades, providing stable cash flows to fund the AI transformation without diluting core profitability. The strategic coherence is evident: use regulated markets as a financial fortress to assault high-growth AI infrastructure opportunities where competitors lack the manufacturing depth and system integration experience. ## Financial Performance & Segment Dynamics Sanmina’s FY2025 results provide compelling evidence that the legacy business can fund its ambitious transformation while delivering shareholder returns. Revenue grew 7.4% to $8.13B, non-GAAP operating margin expanded 30 basis points to 5.7%, and EPS surged 14.4% to $6.04—all while generating $621M in operating cash flow and $478M in free cash flow. The conversion of earnings to cash is exceptional, with FCF representing 79% of net income, demonstrating disciplined working capital management and minimal maintenance capex requirements (1.8% of revenue).

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Segment performance reveals the strategic value of the CPS engine. While IMS generated $6.51B in revenue at 7.79% gross margins, the smaller CPS segment produced $1.62B revenue at 14.60% gross margins and contributed disproportionately to profit growth. In Q4 2025, CPS gross margin hit 14.5%, up 90 basis points year-over-year, driven by favorable product mix and operational efficiencies that partially offset strategic investments in engineering headcount. This dynamic is critical: the higher-margin CPS business is growing faster (7.3% in Q4 vs 3.3% for IMS) and expanding margins while the larger IMS segment provides stable, cash-generative ballast.

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The balance sheet is fortress-like entering the ZT integration phase. With $926M in cash, no revolver borrowings, and a gross leverage ratio of just 0.32x at Q4 end, Sanmina had substantial capacity to fund the $2.05B ZT acquisition through a new $3.5B credit facility. Post-acquisition debt of $2.2B will elevate leverage, but management targets a conservative 1.0-2.0x net leverage ratio over time and is pursuing an investment-grade rating. This matters because it provides margin for error if ZT integration encounters bumps or if AI capex cycles prove more volatile than anticipated. The company also returned $113.7M to shareholders through buybacks in FY2025 while claiming its stock is “undervalued,” signaling management confidence and providing downside support.

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## Outlook, Management Guidance, and Execution Risk Management’s guidance for Q1 2026 reveals both the magnitude of the transformation and the execution challenges ahead. The company projects revenue of $2.9B to $3.2B, with legacy Sanmina contributing $2.05B to $2.15B (4.7% growth at midpoint) and ZT adding $850M to $1.05B for just two months of operations. This implies a ZT annual revenue run rate of approximately $5.1B to $6.3B—consistent with management’s $5-6B target and validating the acquisition’s scale. The midpoint guidance represents 42% sequential revenue growth, a staggering inflection that places immense pressure on integration execution. Non-GAAP operating margin guidance of 5.6% to 6.1% for Q1 2026 is conservative, essentially flat with the 6.0% reported in Q4 2025 despite massive revenue scale-up. Management acknowledges both legacy SANM and ZT will operate within this range initially, which suggests they are prioritizing operational stability over immediate synergies. The real test will be achieving the stated long-term goal of “6% to 7% plus” margins as integration progresses. This margin expansion thesis hinges on three factors: favorable mix shift toward higher-margin AI systems, elimination of duplicate corporate costs, and leveraging Sanmina’s existing low-cost manufacturing footprint in Mexico and India for ZT products. Customer inventory normalization in communications networks provides a benign demand backdrop. Jure Sola characterized the cycle as being in the “eight or nine inning,” with inventories nearing normal levels after a prolonged correction. This matters because it suggests the 17% year-over-year growth in communications/cloud revenue (38% of total sales) has sustainable underpinnings rather than representing a short-term restocking surge. The AI demand driver appears even more durable, with management noting requirements “continue to evolve at a rapid pace” and positioning Sanmina to capture share as AMD and other platform providers ramp next-generation architectures. ## Risks and Asymmetries The ZT Systems acquisition, while transformative, concentrates execution risk around integration complexity and working capital intensity. The deal involved approximately $2B in targeted working capital, primarily inventory, which management admits requires evaluation to ensure it is “supported by customer demand and forecasts.” If AI demand shifts or if ZT’s inventory proves misaligned with evolving specifications, Sanmina could face meaningful write-downs that erode both margins and balance sheet strength. The sheer scale of the acquisition—potentially doubling revenue within two years—creates a binary outcome: successful integration vaults Sanmina into the top tier of AI infrastructure providers, while failure could strain liquidity and distract from the stable legacy business. Geopolitical and tariff uncertainties pose persistent headwinds. Q1 2026 guidance explicitly incorporates “ongoing market uncertainties stemming from tariffs and the geopolitical landscape,” with customers actively evaluating regional manufacturing strategies. Sanmina’s global footprint provides flexibility to shift programs between Mexico, the US, and Asia, but this agility comes at a cost: duplicating capabilities across regions reduces capital efficiency and complicates quality control. The trend toward regionalization benefits Sanmina’s diversified manufacturing base relative to offshore-dependent peers, but the transition period could pressure margins as customers negotiate pricing concessions to offset tariff impacts. The competitive landscape intensifies precisely as Sanmina scales AI exposure. Celestica (TICKER:CLS) reported 25% quarterly revenue growth in its CCS segment, while Flex (TICKER:FLEX) maintains formidable scale and Jabil (TICKER:JBL) pursues aggressive automation. Sanmina’s differentiation—full system integration for AI data centers—requires flawless execution to justify premium pricing. If competitors replicate this capability or if hyperscale customers insource assembly to capture more value, Sanmina’s margin expansion thesis could break. The company’s relatively modest scale compared to Flex and Jabil limits procurement leverage, potentially capping gross margin upside in commoditized portions of the AI supply chain. Legal and regulatory exposures, while financially contained, signal potential governance concerns. The $3.6M in environmental settlements and an $8M IRS dispute are immaterial to Sanmina’s $8B revenue base, but the ongoing False Claims Act suit seeking $100M in treble damages—while vigorously contested—creates headline risk. More concerning are class action lawsuits alleging California Labor Code violations, which could portend higher compliance costs as the company scales domestic manufacturing to support reshoring trends. These overhangs distract management attention during a critical integration period and could impact employee retention in a tight labor market. ## Valuation Context At a trailing P/E of 29.07x and price-to-sales of 0.97x, Sanmina trades at a meaningful discount to AI-exposed EMS peers while commanding a premium to diversified manufacturing plays. Celestica (TICKER:CLS), with similar AI infrastructure exposure, trades at 76.77x trailing earnings—reflecting investor enthusiasm for its established hyperscaler relationships—while Flex (TICKER:FLEX) trades at a more modest 23.35x despite superior scale. Sanmina’s 0.97x sales multiple represents a 60% discount to the typical EMS valuation range of 1.5-2.0x for growth-oriented players, suggesting the market has not yet priced the ZT transformation. The balance sheet strength provides a critical valuation cushion. With net cash pre-acquisition and a post-acquisition debt-to-equity ratio that remains below 0.5x pro forma, Sanmina’s financial leverage is substantially lower than Jabil (TICKER:JBL)’s debt-dependent structure or Celestica (TICKER:CLS)’s working capital intensity. This conservatism reduces equity risk and should command a valuation premium, yet the market applies a discount, likely reflecting integration uncertainty. The company’s 28.3% non-GAAP ROIC—well above its weighted average cost of capital—demonstrates efficient capital deployment that should support multiple expansion as ZT contributes. Capital allocation reinforces the undervaluation thesis. Management repurchased $113.7M in shares during FY2025 while explicitly stating the stock is “undervalued,” and maintains $239M in remaining authorization even after deploying substantial capital for the ZT acquisition. This two-pronged approach—funding transformative growth while returning cash—signals confidence in both the strategic opportunity and the current stock price entry point. For investors, this creates a favorable asymmetry: limited downside from valuation support and balance sheet strength, with meaningful upside if the AI infrastructure narrative gains traction.

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## Conclusion Sanmina stands at the intersection of two powerful investment themes: the AI data center infrastructure buildout and the regionalization of global supply chains. The ZT Systems acquisition transforms the company from a mid-tier EMS provider into a full-system AI infrastructure partner, with management credibly projecting a doubling of revenue to $16B within two years while targeting 6-7% plus operating margins. This strategic leap is financed conservatively and supported by a stable, cash-generating legacy business that has demonstrated consistent execution and margin expansion. The investment case hinges on two critical variables: seamless integration of ZT Systems to capture the $5-6B revenue target without margin dilution, and sustained AI capex growth to absorb the increased manufacturing capacity. The company’s specialized engineering moats, fortress balance sheet, and valuation discount provide downside protection, while the combination of mix shift toward higher-margin systems integration and operational leverage creates meaningful upside asymmetry. For long-term investors, Sanmina offers a rare combination of transformation potential at a reasonable price, with management’s own capital allocation decisions providing a compelling vote of confidence in the stock’s current valuation.